A broker-dealer agreed to pay a fine of US $2.5 million to the Financial Industry Regulatory Authority and three other self-regulatory organizations for alleged violations of its obligation to report large options positions timely and accurately. In addition, two firms resolved disciplinary actions with CME Group exchanges for purportedly violating prohibitions against engaging in transitory exchange for related position transactions. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Broker-Dealer Agrees to Pay $2.5 Million Fine for Not Complying With FINRA Large Options Position Reporting Requirements (includes Compliance Weeds);

Two Firms Settle CME Group Exchanges’ Charges That They Entered Into Contingent EFRPs (includes Compliance Weeds);

Use in US Trial of Testimony Compelled From Two LIBOR Traders in the UK Tanks Their US Conviction for Manipulation; Criminal Charges Dropped Against Two Traders in London Whale-Related Prosecution; and more.

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Broker-Dealer Agrees to Pay $2.5 Million Fine for Not Complying With FINRA Large Options Position Reporting Requirements: Goldman Sachs & Co. LLC agreed to pay a fine of US $2.5 million to resolve charges brought by the Financial Industry Regulatory Authority that, from at least January 2010 through July 2016, it failed to report or accurately report over-the-counter options positions in approximately 21 million instances to the Large Options Position Reporting System hosted by the Options Clearing Corporation. FINRA also claimed that GSCO failed to resubmit a large number of OTC records that were rejected by the LOPR System and violated position limits for OTC options in three different securities. Among other things, on various occasions, GSCO failed to aggregate positions for certain customers; submitted records with various formatting issues; over-reported options positions; and failed to delete from its LOPR report positions with incorrect effective dates, charged FINRA. The majority of GSCO’s fine is payable to FINRA, while the remainder will be payable to Bats BZX Exchange, Inc., NASDAQ ISE, LLC and NASDAQ PHLX LLC.

Compliance Weeds: Generally, FINRA requires members to report or have reported on their behalf any options position in any account or multiple accounts where the firm or any customer, whether alone or in concert, maintains an aggregate position of 200 or more options contracts (whether long or short) of the put class and the call class on the same side of the market for the same underlying security or index. All positions must be reported to the LOPR System by no later than close of business on the business day following the day the transaction or transactions occurred that necessitated the filing. Where aggregate positions meet the 200-contract threshold, the option position of each individual account must be reported. Accounts must be aggregated when they are under common control or acting in concert. Control is presumed for all parties to a joint account who have authority to act on behalf of the account, all general partners of a partnership account, a person or entity that has a 10 percent or more ownership interest in an entity or shares 10 percent or more of an account’s profits and losses, accounts with common directors or management, or an individual or entity that has authority to execute transactions in an account. (Click here to access the May 2016 guidance by FINRA regarding member firms’ LOPR obligations.)

Two Firms Settle CME Group Exchanges’ Charges That They Entered Into Contingent EFRPs: A Chicago Board of Trade and a Chicago Mercantile Exchange member each agreed to settle disciplinary actions charging that they entered into exchange for related position transactions that were transitory in nature, and thus prohibited. In one action, Alphadyne Asset Management, LP, a CBOT member, agreed to pay a fine of US $65,000 to resolve charges that, on November 3, 2015, and March 1, 2016, the firm entered into EFRP transactions involving US Treasury futures to rebalance positions held by various Alphadyne funds that were contingent upon the execution of other EFRP transactions. CBOT claimed these transactions were executed without incurring market risk. Unrelatedly, Barclays Bank PLC agreed to pay a fine of US $15,000 to settle CME charges that it also engaged in a transitory EFRP on April 5, 2016. According to CME, the bank sold E-mini S&P 500 futures and bought SPDR S&P exchange traded fund (SPY) contracts while simultaneously selling the SPY contracts and buying S&P 500 Index option combos against the identical counterparty. CME claimed the SPY contracts were entered into and liquidated without Barclays incurring market risk. Separately, Yakun Popli, a nonmember agreed to pay a fine of US $15,000 and be suspended from all access to CME Group trading for 10 business days for placing orders during the pre-open on one or more occasions from January 30 through October 28, 2014, that were not made in “good faith.” CME claimed these orders were not placed for the purpose of executing bona fide transactions and thus constituted a disruptive practice. INTL FC Stone Markets LLC consented to pay a fine of US $20,000 and disgorge profits of over US $9,000 for violating position limits in corn futures during one day in 2016.

Compliance Weeds: CME Group exchanges do not permit transitory EFRPs for any purpose. (Click here to access CME Group Rule 538.C.) CME Group says that an EFRP is transitory when the execution of an EFPR is contingent upon the execution of another EFRP or related position transaction between the same parties and the related positions are offset “without the incurrence of market risk that is material in the context of the transaction.” (Click here to access CME Group MRAN RA1707-5 (July 17, 2017).) CME Group will also regard an EFRP as transitory if two EFRPs involving economically equivalent futures positions traded on a CME Group and another exchange result in the related position component being offset between the same parties. Structuring a swap so that it settles through an Exchange for Risk Transaction is not considered to be entering into a transitory EFRP provided the settlement value (floating price) is subject to material market risk. Immediately offsetting exchange of futures for physical positions involving foreign currency positions are also not considered transitory EFRPs if executed in accordance with CME Group rule. (Click here to access CME Group Rule 538.K; see also MRAN Q/A 26.) ICE Futures U.S. has equivalent prohibitions, although it also permits immediately offsetting EFP transactions involving physical delivery obligations by participants in the London Gold Auction administered by the ICE Benchmark Administration. (Click here to access ICE Futures U.S. FAQs – January 30, 2017, Q/A22.)

Use in US Trial of Testimony Compelled From Two LIBOR Traders in the UK Tanks Their US Conviction for Manipulation; Criminal Charges Dropped Against Two Traders in London Whale-Related Prosecution: A US Federal Court of Appeals sitting in New York City set aside the convictions of Anthony Allen and Anthony Conti, two former Rabobank traders, for their alleged role in the bank’s manipulation of London Interbank Offering Rates through the LIBOR submission process at various times from mid-2005 through 2011. The court set aside the 2015 conviction of the two traders because of the use of testimony they were required to give to UK regulators in their US trial. According to the court, “the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.” (Click here for background on the conviction of Mr. Allen and Mr. Conti in the article “Alleged Criminal Conduct Snares Multiple Ex-Financial Services and Regulator Defendants in New York” in the November 8, 2015 edition of Bridging the Week.) Separately, the US Attorney’s Office in NYC announced that it was proposing to drop all criminal charges against Javier Martin-Artajo and Julien Grout for their alleged role in JP Morgan Chase’s credit default swaps trading in 2012 that resulted in a loss to the bank of over US $5.8 billion – the so-called “London Whale” incident. (Click here for background on this incident in the article “US CFTC Files and Settles Charges against JP Morgan Chase Bank Employing Its New Anti-Manipulation Authority Related to Certain of the Bank's London Whale Trading” in the October 23, 2013 edition of Bridging the Week.) Among other things, the prosecutors believed they could no longer rely on the testimony of Bruno Iksil, the nicknamed “London Whale” and a former colleague of the two defendants, because of his public statements and writings.

More briefly:

MarkitSERV Temporarily Enjoined From Cutting Off Trade Processing Services to trueEX, LLC: trueEX, LLC obtained a preliminary injunction against MarkitSERV Limited from a federal district court in New York City, preventing MarkitSERV from cutting off certain interest rate swaps trade processing services trueEX claimed it required to operate its IRS swap execution facility. After trueEX announced it was developing a new IRS trade processing system of its own in December 2015, MarkitSERV served notice that it would terminate its trade processing services to trueEX effective May 14, 2017; it later extended this date to July 24. trueEX filed a lawsuit against MarkitSERV claiming, among other things, that MarkitSERV’s conduct constituted a violation of federal anti-trust laws. In granting a preliminary injunction to trueEX, the court noted that it was not ruling on the merits, but solely balancing potential hardships between the parties. Without a preliminary injunction, “trueEX is likely to suffer economic injury in the form of lost clients and lost revenue, injury that has the potential to be ruinous in nature,” said the court.

CBOE Futures Exchange Issues Best Practices for Interfacing with Exchange’s Trading System: CBOE Futures Exchange issued an itinerary of best practices for Trading Privilege Holders and market data recipients when responding to different circumstances that might arise when interacting with the exchange’s trading system and market data services. Among other topics addressed are what a TPH should do if it receives execution and clearing reports in excess of original order quantity or receives possible resend or possible dupe reports. In both circumstances, the TPH should contact the Help Desk.

Senate Ag Committee Considers Three CFTC Commissioner Nominees This Week; Hunter Pierce to be Nominated as SEC Commissioner: The US Senate Committee on Agriculture, Nutrition, and Forestry will hold a hearing on the nominations of Rostin Behnam, Brian D. Quintenz, and Dawn Stump as Commodity Futures Trading Commissioners on July 27. (Click here for background in the article “President Nominates Rostin Behnam as CFTC Commissioner and Kevin McIntyre as Chairman of FERC” in the July 16, 2017 edition of Bridging the Week, and here for the article “Acting CFTC Chairman May Soon Be Acting No More” in the June 18, 2017 edition of Bridging the Week.) Separately, President Donald Trump announced his intention to nominate Hester Pierce to serve as a commissioner of the Securities and Exchange Commission. Ms. Pierce is currently a Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University and previously served as a staff attorney at the SEC. Ms. Pierce was previously nominated to serve as an SEC commissioner by President Barack Obama.

ICE Europe Resolves Disciplinary Actions Against Two Warehouses: ICE Futures Europe resolved disciplinary actions against 4STOX N.V., a warehouse keeper, and CTW Commodities (UK) Limited, an entity 4STOX outsourced certain logistical operations to. 4STOX was accused by the exchange of violating its Grading and Warehousekeeping Procedures after an inspection of lots of Robusta coffee at a warehouse uncovered sampling issues. 4STOX agreed to pay a fine of GB £50,000 (approximately US $65,000) to resolve this matter. CTW was accused of violating the same procedures for its role as outsource agent, but was solely issued a warning.

Australian Regulator Consults on Proposed Regulatory Regime Regarding Financial Benchmarks: The Australian Securities and Investments Commission sought feedback on potential new rules for administering a financial benchmark regulatory regime. The new regime is based on the IOSCO Principles for Financial Benchmarks issued in July 2013 (click here to access) and is designed to facilitate equivalence assessments under overseas regimes. ASIC will accept comments through August 21.

OFAC Sanctions List Updated: Last week, the Office of Foreign Assets Control updated its list of “Specially Designated Nationals and Blocked Persons.” OFAC is the enforcement agency of the US Treasury Department responsible for implementing economic and trade sanctions to comport with US national security goals.

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 22, 2017. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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ABOUT GARY DEWAAL

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.